The changing face of checking accounts

Gone are the days when free checking was a given. Fees are up, and less than half of noninterest checking accounts today are free. That number is likely to drop further as banks and their customers adjust to recent regulatory changes in banking.

“(Free checking) became such a commodity in recent years, that there’s been this assumption that you can get free checking without even trying,” says Greg McBride, CFA, senior financial analyst at Bankrate. “Well, you can still get free checking, only now you have to try a little bit. You have to shop around.”

“We’re in a new normal where someone must anticipate some kind of a maintenance fee, unless you somehow exchange value and subsidize that maintenance fee,” he says.

Bankrate’s data come from surveying the five largest banks and five largest thrifts in 25 of the nation’s biggest markets from Aug. 1-12, 2011. Bankrate asked institutions about terms on one generic noninterest account and one interest-bearing account for the general consumer.

Based on the study’s results, here are seven ways checking accounts have changed in the last year and how you can adapt to keep your checking costs low.

Free checking on the endangered list

The number of free checking accounts continues to drop, following the sharp decline established in last year’s Bankrate Checking Study. Just 45 percent of noninterest checking accounts are free of maintenance charges, down from 65 percent in 2010. That number peaked at 76 percent two years ago.

Overall, 60 percent more noninterest accounts carry fees and balance requirements than they did last year. And while economic factors may be a contributing factor, “the entire model of free checking has been turned upside down because of new regulations,” Nagarkatte says.

In particular, he cites Regulation E, which forces banks to get a customer’s opt-in before they can charge overdraft fees on debit transactions, and the Durbin Amendment, which limits the swipe fees banks can charge merchants for processing debit cards.

Tip: While free checking is in decline, more accounts have introduced waivers to avoid monthly fees, McBride says. Last year, 88 percent of noninterest accounts were either free or could become free if the customer signed up for direct deposit. This year, the number is 92 percent, which shows banks are still willing to offer checking for free in exchange for a deeper relationship with customers.

“Instead of getting the checking account for free, now you have to earn it,” McBride says. “How do you earn it? On a noninterest account, it’s direct deposit.”

Account maintenance fees climbing

As if it’s not enough that more banks are charging maintenance fees for checking accounts, those maintenance fees also are rapidly rising. In Bankrate’s annual survey, the average account maintenance fee rose from $2.49 last year to $4.37 this year, an increase of 85 percent.

That adds up to about $52.44 a year, an amount that isn’t going to break the bank but might surprise people accustomed to free checking, McBride says.

Tip: With so much change going on with checking, watch your statement for new fees such as “account maintenance fees,” “monthly service charges” or “monthly service fees,” McBride says.

“Monthly fees and balance requirements are very much in flux, and those are the type of changes that you really need to have an eye on,” he says. “Any time you get a new fee schedule from the bank, it indicates there have been some changes, and it’s something you need to look at closely.”

Debit card fees may be on the way

Maintenance fees on debit card accounts aren’t yet common, so many people may not even know to scrutinize their bank statements for them. At this point, only 4 percent of accounts charge a point-of-sale fee when using a debit card, and less than 2 percent charge a monthly or annual fee for carrying a debit card. But that’s expected to change in the new regulatory environment, McBride says.

“The Durbin Amendment is really a game changer on the debit card front. And I think, in addition to continued declines in the prevalence of free checking, we will see an increase in debit card fees, whether it’s a fee to carry the card or it’s a transaction-based fee,” he says.

Tip: If your bank begins charging a debit card fee and you don’t want to move your checking account, you can always go back to carrying a credit card. As long as you pay off your balance every month, credit cards can have advantages over debit cards such as rewards programs and better protection from fraud liability.

Higher hurdles to avoid fees

Many checking accounts with built-in monthly fees give account holders the ability to avoid them by clearing specific hurdles, such as holding a minimum average balance in the account or signing up for direct deposit.

Even so, these hurdles are rapidly getting higher as banks attempt to increase fee revenue. The average minimum balance required to avoid a monthly fee rose from $249 in 2010 to $585 this year, an increase of nearly 135 percent.

“The big increases in balance requirements and fees aren’t just from banks that already have those raising them, it’s also from those that didn’t use to have a balance requirement or a fee now instituting one,” McBride says.

Tip: If you think your checking account has become too expensive, shop around for a better deal, McBride says. Competition is still stiff in the banking industry, and many different banks, credit unions and community banks may offer checking accounts that are much cheaper than your current account. Another alternative is an online bank.

ATM fees on the rise

In this year’s Checking Survey, ATM surcharges hit an all-time high for the seventh consecutive time. Last year, the average charge was $2.33. This year, it’s $2.40. That’s an increase of 7 cents, or about 3 percent.

“The ATM surcharge is almost universal, and it’s been that way for years,” says McBride. “So the fee increasing every year is a function of somebody planting their flag and moving their fee up to that next threshold.”

The most common ATM fee in our survey was $3.

Tip: If you have a smartphone, such as an iPhone or a BlackBerry, try pulling up a banking application before you use another bank’s ATM. Many bank smartphone apps can use your phone’s GPS functionality to locate in-network ATMs near you. Walking or driving a few blocks may save you the fee charged by the other bank’s ATM and the out-of-network fee your own bank will charge, easily amounting to $5 or more.

Interest checking even less interesting

With some exceptions, interest checking continues to become less attractive for account holders. Yields were down for the fifth consecutive year, falling 2 basis points to an all-time low of 0.08 percent.

Even as yields fell, fees rose. The average monthly maintenance fee for an interest-bearing checking account jumped 8.5 percent, from $13.05 to $14.05.

Avoiding those fees is mostly about keeping lots of money stored at your bank, earning a miniscule interest rate. While many noninterest checking accounts allow you to avoid monthly maintenance fees by signing up for direct deposit, 81 percent of interest accounts require maintaining a minimum balance to steer clear of monthly fees.

Tip: If you want to earn interest on your checking account balance, and you tend to make a lot of debit card transactions, you might want to look into high-interest checking accounts, McBride says. Mostly offered by small banks, credit unions and online banks, high-interest checking accounts can pay more than 1 percent on deposits.

“For those who can meet the requirements, it’s a slam-dunk because the interest earnings trump anything else you’re going to find on risk-free investments,” McBride says.

Overdraft fees edge higher

If you slip up and make a purchase with a check or debit card your balance won’t cover, you’ll pay more than ever for the error these days.

Like ATM fees, overdraft fees tend to rise at or near the rate of inflation, and this year is no exception. The average nonsufficient funds, or NSF, fee rose 1 percent, from $30.47 last year to a record $30.83 this year.

Tip: Thanks to the Fed’s Regulation E, which forces banks to get a customer’s opt-in before charging him or her an overdraft fee for a debit purchase, it’s easier to avoid overdrafts.

All you have to do to avoid overdraft charges is refuse to opt in. That way, if you don’t have enough money to cover a purchase, your card will simply be declined at the register and can’t be used to complete the purchase while costing you a hefty fine.

Alternatively, many banks allow you to set up a linkage between a savings account or line of credit and your checking account, allowing you to tap them if you don’t have the cash to cover a purchase.

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